Many of us including mainstream economists tend to get carried away by the lure of free market economics. Turns out it is no more than being wishful. To get us out of our delusions, we need someone like Russell Napier, the independent strategist who has been calling out for sustained inflation soon after the Covid onset when governments across the world took over broad money creation through what he calls as politicisation of credit. See here and here for his 2020 and 2021 views as featured in the 3L&3S. Now that inflation is here, he expounds on his theory of financial repression and how things are likely to pan out from here and what should investors do in this interview with The Market.
Napier makes the point given the elevated debt to GDP levels of western economies, the only way out is to inflate away the debt i.e, grow nominal GDP fast enough with inflation remaining higher than interest rates. Western governments are engineering that by taking control over money creation through credit guarantee schemes introduced during the Covid crisis but never pulled back on the pretext of the war and the ensuing energy crisis. He reckons this shift is structural:
“For the government, credit guarantees are like the magic money tree: the closest thing to free money. They don’t have to issue more government debt, they don’t need to raise taxes, they just issue credit guarantees to the commercial banks.”
He says this isn’t new as the US and UK did exactly this to reduce the debt post WW-II until the debt to GDP reduced to levels that Reagan and Thatcher could afford to unveil their free market policies. Central banks were impotent during that period and are likely to remain so now.
“We today have a disconnect between the hawkish rhetorics of central banks and the actions of governments. Monetary policy is trying to hit the brakes hard, while fiscal policy tries to mitigate the effects of rising prices through vast payouts. An example: When the German government introduced a €200 bn scheme to protect households and industry from rising energy prices, they’re creating a fiscal stimulus at the same time as the ECB is trying to rein in their monetary policy….. Did Berlin ask the ECB whether they can create a rescue package? Did any other government ask? No. This is considered emergency finance. No government is asking for permission from the central bank to introduce loan guarantees. They just do it.”
So why is the dollar rallying if interest rates are likely to remain below inflation for the foreseeable future. He reckons it is temporary as capital flows out of Europe, UK and Japan to America first:
“…These countries are already well on their path to financial repression. It will happen in the US, too, but we have a lag there – which is why the dollar is rising so sharply. Investment money flows from Europe and Japan towards America. But there will come a point where it will be too much for the US as well. Watch the level of bond yields. There is a level of bond yields that is just unacceptable for the US, because it would hurt the economy too much. My argument for the past two years was that Europe can’t let rates go up, not even from current levels. The private sector debt service ratio in France is 20%, in Belgium and the Netherlands it’s even higher. It’s 11% in Germany and about 13% in the US. With rising interest rates, it won’t take long until there will be serious pain. So it’s just a matter of time before we all get there, but Europe is at the forefront.”
He says the endgame will be stagflation much like we saw in the 70s but not before a long period, say 15yrs of capex boom as the west reindustrialises itself or ‘freindshores’ production:
“People’s wages will rise. Financial repression moves wealth from savers to debtors, and from old to young people. It will allow a lot of investment directed into things that people care about. Just imagine what will happen when we decide to break free from our one-sided addiction of having pretty much everything we consume produced in China. This will mean a huge homeshoring or friendshoring boom, capital investment on a massive scale into the reindustrialisation of our own economies……a lot of production could move back to Europe, to Mexico, to the US, even to the UK. We have not had a capex boom since 1994, when China devalued its currency.”
He implies this puts India in a relatively better position:
“There are some emerging markets that are attractive today, as they have low levels of debt. But in a world where large parts of the global economy are in a system of financial repression, there will be all sorts of capital controls. That means that as an investor, you best invest in jurisdictions where you plan to spend your retirement. To me, that means I don’t want to be invested in China at all, for example. The risks of getting stuck there are way too high, as the example of Russia has shown.”

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